Central banks must act quickly on inflation, warns BIS

ZURICH, Switzerland - Central banks must not let inflation become entrenched, with the threat of stagflation looming over the global economy, the Bank for International Settlements warned Sunday in its annual economic report.

BIS, considered the central bank of central banks, said institutions will have to move swiftly to ensure a return to low and stable inflation, while limiting the impact on growth.

"The key for central banks is to act quickly and decisively before inflation becomes entrenched," said BIS general manager Agustin Carstens.

"If it does, the costs of bringing it back under control will be higher. The longer-term benefits of preserving stability for households and businesses outweigh any short-term costs."

BIS's flagship report said that in restoring low, stable inflation, central banks should seek to minimize the hit to economic activity, in turn safeguarding financial stability.

BIS said engineering a so-called soft landing had historically been difficult, and the starting conditions now were making the task all the more challenging.

"It would be more desirable if we could have a soft landing because that would mean that the tightening of monetary policy could be more subdued," Carstens told a press conference.

"But even if this is not the case, definitely the priority should be to combat inflation," to prevent the world economy from slumping. 

STAGFLATION DANGERS

After the shock of the Covid-19 pandemic, central banks initially saw the return of inflation as temporary as the economy picked up again.

But the rise in prices has sharply accelerated since Russia's invasion of Ukraine in February.

BIS said the global economy risked entering a new era of high inflation.

The dangers of stagflation -- stagnant growth coupled with rising prices -- loom large, as a combination of lingering disruptions from the pandemic, the war in Ukraine, soaring commodity prices and financial vulnerabilities cloud the outlook, it added.

Policymakers must press ahead with reforms to support long-term growth and lay the groundwork for more normal fiscal and monetary policy settings, BIS said.

While the European Central Bank plans to raise interest rates in July and then again September, the US Federal Reserve on Wednesday carried out its largest rate hike since 1994.

The Fed announced a 0.75-percentage-point rise and said it is prepared to do so again next month in an all-out battle to drive down surging inflation.

1970s COMPARISON

Established in Basel in 1930, the BIS is owned by 62 central banks, representing countries that account for about 95 percent of global gross domestic product (GDP).

In its annual report, the BIS looked at the stagflation of the 1970s, when the oil shocks of 1973 and 1979 caused inflation to jump.

In 1973, oil prices had more than doubled in the space of a month. Oil occupied a much more central place in the economy, it said.

Moreover, inflation was already rising before the oil shock, while the global economy is now emerging from a long phase of low inflation.

But the BIS also highlighted other points of vulnerability, including the current high level of private and public debt.

And with Russia's war in Ukraine, inflation this time is not only based around oil, but also other sources of energy, agricultural raw materials, fertilizers and metals.

The most pressing challenge for central banks is therefore to bring inflation down to low levels, according to the BIS.

High inflation situations tend to be self-reinforcing, warned the BIS, especially when wages spiral into an attempt to offset rising prices.

Agence France-Presse

European Central Bank signals rate hike as soon as July to combat inflation

FRANKFURT, Germany - European Central Bank chief Christine Lagarde hinted Wednesday at a first interest rate hike in July to tackle soaring inflation, echoing the actions of other major central banks and heralding the end of the eurozone's cheap money era.

The ECB should end its bond-buying stimulus "early in the third quarter" and could raise interest rates "only a few weeks" later, Lagarde said in a speech in the Slovenian capital Ljubljana. 

The comment is the clearest sign yet from Lagarde that the ECB is ready to move on rates sooner rather later, as the institution trails rate hikes made by the US Federal Reserve and others to tame global inflation.

Any hike would be the ECB's first in over a decade and would lift rates from their current historically low levels.

These include a minus 0.5 deposit rate which effectively charges banks to park their excess cash at the ECB overnight.

Inflation in the eurozone climbed to 7.5 percent in April, an all-time high for the currency club and well above the ECB's own two-percent target.

The surge, driven in no small part by steep increases in prices for energy due to the Russian invasion of Ukraine, has strengthened calls for the ECB to follow its peers towards hikes. 

ECB policymakers will decide their course of action in upcoming June 9 and July 21 meetings, with the July date now seen as the most likely opportunity for a rate announcement.

- Rate rise -

At its last meeting in April, the ECB's governing council resolved to end its vast monthly bond purchases "in the third quarter".

Over recent years, the scheme has hoovered up billions of euros in government and corporate bonds each month to stoke economic growth and keep credit flowing in the 19-nation currency club.

The ECB should draw a line under it "early" in the third quarter, which starts in July, Lagarde specified on Wednesday.

Ending net purchases under the programme would open the door to an interest rate rise that could follow "only a few weeks" after, she said. 

After the initial move the process of monetary policy "normalisation", taking interest rates out of negative territory, would be "gradual".

- July pressure -

"To sum up Lagarde's speech: first rate hike on July 21," Carsten Brzeski, head of macro at ING bank, said on Twitter.

Decisions by the Fed and the Bank of England to raise rates aggressively to counter inflation have added to the pressure on the ECB to act.

German central bank president Joachim Nagel said Tuesday he "will advocate a first step normalising ECB interest rates in July".

The call made by the head of the traditionally conservative Bundesbank has been echoed by other members of the governing council.

On Wednesday, the head of the French central bank Francois Villeroy de Galhau also said the ECB would "progressively raise rates from the summer" to steer inflation towards the ECB's two-percent target. 

The central bank is set to ratchet up interest rates at a delicate moment for the economy.

The war in Ukraine has both pushed up prices and added to supply chain disruptions, putting further strain on households and businesses.

In response to the invasion, the European Union has sought to reduce its reliance on Russian energy imports and is in discussions over an embargo of Russian oil that would add to the economic stress.

The ECB would raise its rates in July "followed by a return to zero in September" Gilles Moec, chief economist at Axa insurance, told AFP.

But "between the war in Ukraine, a complicated coronavirus situation in China", which has seen a series of lockdowns and spillovers from rate hikes in the United States, the ECB will not be able to "pursue normalisation easily", Moec said.

Agence France-Presse

Bank of Japan keeps rates steady

TOKYO - The Bank of Japan kept monetary policy steady on Thursday and maintained its upbeat view of the economy, signalling its conviction that a solid recovery will gradually accelerate inflation towards its 2 percent target without additional stimulus.

But new board member Goushi Kataoka dissented to the BOJ's decision to maintain its interest rate targets, saying current monetary policy was insufficient to push inflation up to 2 percent during fiscal 2019.

In a widely expected move, the BOJ maintained the 0.1 percent interest it charges on a portion of excess reserves that financial institutions park at the central bank.


At the two-day policy meeting that ended on Thursday, it also kept its yield target for 10-year Japanese government bonds around zero percent.

The decision was made by an eight-to-one vote.

BOJ Governor Haruhiko Kuroda will hold a news conference at 3:30 p.m. (0630 GMT) to explain the policy decision.

The BOJ revamped its policy framework last year to one targeting interest rates rather than the pace of money printing, after three years of huge asset purchases failed to drive up inflation to its 2 percent target.

source: news.abs-cbn.com

China's central bank increases its power in battle to curb risks

BEIJING - China's central bank has been quietly boosting its policy independence and regulatory reach as it seeks to contain risks to the financial system, policy insiders said, to help ensure stability ahead of a five-yearly leadership team transition this year.

By greater use of market mechanisms to adjust interest rates instead of changing the official benchmark rates, which need political approval, the People's Bank of China has assumed more targeted, timely and effective control of its principal policy objective - to calibrate the cost of capital in the economy.

And by broadening the scope of the tools it uses to assess and limit the accumulation of risky assets in the banking system, it has expanded its oversight powers without getting embroiled in the kind of bureaucratic infighting that has beset plans to create a financial super-regulator.

That has given the PBOC room to manoeuvre at a time when it needs to contain speculative bubbles and risky lending while avoiding abrupt tightening measures that could hurt the economy.

"China faces big systemic risks, and 2017 is a crucial year for controlling such risks," said a policy adviser.

"The central bank has been expanding its regulatory functions and it's taking an over-riding role (on risk controls)."

The PBOC is likely to guide market interest rates higher using reverse repurchase agreements (repos), and its standing lending facility (SLF) and medium-term lending facility (MLF), while keeping benchmark interest rates steady, policy advisers said. That will allow it to fine-tune borrowing costs without using the blunt instrument of benchmark rates, which could hurt the heavily indebted corporate sector.

"China's economic fundamentals are slowly improving, but there could be problems if we tighten policy too quickly," a second policy adviser said.

The central bank raised short-term interest rates on March 16 in what economists said was a bid to stave off capital outflows and keep the yuan currency stable after the Federal Reserve had raised U.S. rates.

That followed increases in its repo rates and the SLF on Feb. 3, and a rise in rates on the MLF in late January.

Its recent changes to interest rates have been announced during market trading, including just hours after the Fed raised rates.

In contrast, previous changes in official benchmark lending and deposit rates, which needed cabinet approval, often came in the evening or at weekends.

China's central bank still has much less autonomy than Western peers, so it doesn't have the final word on adjusting official interest rates or the value of the yuan. The basic course of monetary and currency policy is set by the cabinet or by the Communist Party's ruling Politburo.

The PBOC did not return requests for comment.

TWIN PILLARS

Under long-serving Governor Zhou Xiaochuan, the PBOC has been a driver of the reform agenda, with a long-term goal to make banks' borrowing costs more market driven to improve resource allocation and wean the economy off its reliance on state-led investment.

Reuters reported in 2015 that China was considering bringing together its banking, insurance and securities regulators into a single super-commission, following a stock market crash that was blamed in part on poor inter-agency coordination.

But policymakers and the different bureaucracies have yet to reach a consensus on how to proceed with a regulatory overhaul.

"Such an overhaul is unlikely to happen soon because it concerns interests, personnel arrangements and relationships between different departments," said another policy adviser.

Chen Yulu, a central bank vice-governor, told a forum last month that the PBOC is trying to establish a "twin-pillar framework of monetary policy plus macro-prudential policy".

The central bank's macro-prudential assessment (MPA) is a formal evaluation that assigns a score to each bank based on parameters believed to include asset quality, capital adequacy, the proportion of liquid assets and stability of funding.

The MPA was launched last year and, while not publicly disclosed, the PBOC has widened the risk-assessment framework to include off-balance-sheet wealth management products (WMPs) in the first-quarter report, sources at commercial banks said, in line with the central bank's announcement in December.

"To control financial risks, we cannot have a fragmented regulatory system under which different agencies do their own things," said a source at a major commercial bank.

"Letting the central bank take the lead is most suitable, given that it's tasked to oversee money supply, liquidity, and control systemic risks."

WMPs, often linked to shadow banking, have seen explosive growth in recent years, with funds channelled into stock and bond markets.

"It's necessary for the PBOC to take on more regulatory functions under its MPA because there are many hidden risks that could pose a threat to China's financial stability," said the second policy adviser.

The official Shanghai Securities News reported last month that mortgages could also be included in the MPA this year. Home mortgages accounted for nearly 40 percent of China's record new loans of 12.65 trillion yuan ($1.8 trillion) last year.

The Organisation for Economic Co-operation and Development (OECD) says China's total private and public debt has grown to more than 250 percent of GDP, up from 150 percent before the global financial crisis. ($1 = 6.8979 Chinese yuan renminbi)

(Reporting by Kevin Yao; Editing by Will Waterman)

source: news.abs-cbn.com

Fed mulls policy exit, eyes October end of asset purchases

WASHINGTON - The Federal Reserve has begun detailing how it plans to ease the U.S. economy out of an era of loose monetary policy, indicating it will end its asset purchases in October and appearing near agreement on a plan to manage interest rates in the future, according to minutes of the last Fed policy meeting.

The minutes from the June 17-18 meeting indicate the Fed envisions using overnight repurchase agreements in tandem with the interest it pays banks on excess reserves to set a ceiling and floor for its target interest rate.

Though no decisions have been announced, the discussion has become detailed enough for Fed officials to contemplate the proper spread between the two - mentioned in the minutes as 20 basis points.

The minutes showed the Fed participants also "generally agreed" that monthly bond purchases would end in October, with a final reduction of $15 billion in monthly purchases of U.S. Treasuries and mortgage-backed securities.

Fed officials expressed overall confidence that moderate economic growth will continue and unemployment and inflation will gradually move towards the central bank's targets. If anything, there was concern recent low volatility in financial markets showed investors "were not factoring in sufficient uncertainty."

Analysts found little in the minutes to suggest the Fed will move forward its first interest rate increase, currently expected in the middle of next year.

But there was ample discussion about how the central bank should exit from policies put in place to fight the 2007-2009 financial crisis.

According to the minutes, there continues to be division over when the Fed should stop reinvesting proceeds of the $4.2 trillion in assets it purchased to support financial markets.

Ending reinvestment will put the central bank's balance sheet on a declining path, and some members argue that should not take place until interest rates have been increased.

In addition, the minutes indicated the reinvestment decision may not be an all-or-nothing choice: the central bank may try to "smooth the decline in the balance sheet," perhaps by letting some maturities expire each month and reinvesting the proceeds of others.

The Fed's exit strategy is complicated because its stimulus programs flooded the financial system with $2.6 trillion that has ended up back at the Fed as excess bank reserves. With that much money on hand, banks have little need to borrow from each other in the federal funds market - stifling an important interest rate tool.

The New York branch of the U.S. central bank has been testing the reverse repo facility since September as a way to help control short-term interest rates, and has seen strong demand from money market funds and other bidders.

In reverse repos, the Fed borrows funds overnight from banks, large money market mutual funds and others. The tool is designed to mop up excess cash in the financial system which could keep market rates too low if left in circulation.

source: www.abs-cbnnews.com